A Baby Boomer looks at health, finance, retirement, grown-up children and ... how time flies.

Sunday, September 25, 2011

The Big 3 Problems with Social Security

Social Security has been called the most successful government program in all of history, lifting millions of senior citizens out of poverty, relieving millions of families from the burden of taking care of elderly and infirm parents, and giving all Americans comfort in the knowledge that they will be taken care of in old age, when their faculties have deteriorated and they no longer have the ability to work.

Of course, that was when the system was financially sound. When there were 7 or 8 workers supporting each pensioner. When the country's economy was expanding, and America ruled the economic world.

Now, suddenly, when I'm ready to start collecting Social Security, after contributing to other people's pensions for some 40 years, economists and politicians tell us that Social Security is in trouble. The system is paying out more than it's taking in. The flood of retiring Baby Boomers threatens to drown the system in red ink. In a few years there will only be enough money coming into Social Security to pay out maybe three quarters of what's been promised to America's senior citizens.

Some politicians are saying the Social Security system is nothing but a big Ponzi scheme anyway -- the early enrollees made out like Madoff's early investors, but now with relatively fewer workers to "invest" in Social Security the rest of us will be left holding the bag. They want to throw out this system that's been a cornerstone of American life for over half a century, and replace it with some ... other ... plan that involves sending the aged off to gamble in the stock market. Meanwhile, people under 40 watch payroll deductions come out of every paycheck, and they don't believe they will collect even one red cent from this doomed social experiment.

It's all very distressing. But let's sit back a moment and assess what's really going on. What the real problems are. Fair warning: I'm offering my opinion here, and I don't claim to have a PhD in Social Security policy. But I do have some common sense -- and I also have no ax to grind, except I would like to actually collect the money the government has been telling me it's going to pay me (see the Social Security site to see how much it's promising to pay you), and I'd like for my kids to be able to collect some Social Security as well.

What I see are three basic fundamental problems. Feel free to disagree with me if you think I'm off base, or, even better, to offer other ideas if you have them.

Problem 1) The number of Social Security beneficiaries is growing at a faster rate than the number of people contributing to the system. The problem is undeniable. The question is what to do about it. We've already raised the government-approved retirement age from 65 to 66, and it's going up to 67. This means Social Security will be able to delay having to support all us Baby Boomers for a year or two, saving lots of money. The rationale for this is that people are living longer than they were in the 1930s, when the retirement age was set at 65, so the retirement date should be bumped up to reflect longer life expectancies. Now some people, such as the President's Commission on Fiscal Responsibility, recommend that the retirement age be pushed back even further to 69 or 70 -- delaying payments even more, and of course canceling payments to anyone unfortunate enough to die in their late 60s.

In a way this makes sense. We're all living longer. We should retire later. Except, just because we're living longer, that doesn't make the work any easier. Do you want to be 68 years old, hefting packages for UPS or climbing on a roof for a construction team, with your bad back and arthritic knees? Oh, people say, most people work these days in an office. They can work until they're 70. Well, first of all, a lot of people work behind a desk, but a lot of people don't. So is someone going to set up two classes of retirees? The physical laborers who get to retire at 67, and the desk workers who have to wait until 70? Who would classify those jobs, and under what kind of political pressure? And besides, I can tell you, as a man who sat in an office for 40 years, that a desk can take its physical toll. Ask my carpal tunnel syndrome. Ask the herniated disks in my spine.

Some people want to disqualify "rich" people from receiving Social Security. But where do you draw the line between the "poor" Social Security recipients, and the "rich" people who are disqualified? Would the same cut-off income level be used in high cost-of-living areas like New York or coastal California, and low-cost places like rural Texas or Georgia? And then ... Social Security was supposed to be an insurance program, not a welfare program. That's why the program has enjoyed such widespread support for over half a century. If you disqualify 20 or 30 percent of the elderly from receiving any Social Security, don't be surprised if Social Security loses support among this part of the population.

No, I don't think there's a future in trying to limit the number of beneficiaries. Maybe tinker around the edges -- raise the earliest age you can collect benefits from 62 to 64, or possibly raise the percentage of Social Security payments subject to income tax. But any wholesale change is a non-starter.

Problem 2) Too many people rely on Social Security for most or all of their retirement income. Social Security was supposed to be an insurance program for old people, so they wouldn't fall into poverty. It was never designed -- and it's unrealistic to expect -- that Social Security will provide a comfortable retirement for the majority of Americans. About one third of the elderly rely on Social Security for over 90 percent of their income. And two thirds rely on it for at least half of their income. That's too many people leaning on the system for too much support.

Sure, there are going to be a certain number of people, for health or other reasons, who go into their senior years with no income, no savings, no means of support. And there will be some who for one reason or another run out of savings. But it shouldn't be 33 percent of the population. I think we need to revisit people's attitudes about Social Security. It is meant to provide the basics for retired people, so they have a roof over their heads and a potato in the pot. But it is not meant to finance two cars in the garage, or greens fees at the local golf course, or a cruise to the Bahamas, or even a cross-country trip to visit the grandchildren. If you want to live like that, you'd better plan for it, and save for it, and be able to afford it -- and not take it out of the paychecks of workers who might actually be making less money than you are.

We have a shared and agreed-upon responsibility to support people in their old age. But it really does seem that a lot of people expect too much from Social Security. It's hard to sympathize with the people who scream and shout and stomp their feet and raise holy hell if any politician anywhere even suggests denying one single penny to any Social Security recipient at any time now or in the future. It's also reasonable for younger people -- our sons and daughters -- to expect that they, too, will see the benefits of Social Security in their golden years, even though they may get less than what their parents enjoyed because people born in the 1930s and 1940s had the good timing to be collecting Social Security when there were lots of workers and not all that many beneficiaries.

Problem 3) The Social Security tax, aka the payroll tax, is regressive. The worker who makes $20,000 a year pays approximately 14 percent of his paycheck into Social Security (including the employer's contribution). The worker who makes $60,000 a year pays 14 percent. The worker who makes $100,000 pays 14 percent. That's what they call a "flat tax." It's not a progressive tax, It's a flat tax. But the worker who makes $200,000 a year pays only 7 percent of his wages into Social Security. And the worker who makes $500,000 a year pays less than 3 percent. That's not a progressive tax. It's not a flat tax. It's a regressive tax that perversely charges poor people more than rich people for the same basic program.

So I'm with the Republicans on this one. The Republicans want a "flat tax." I say, let's make the payroll tax a flat tax, and charge the $500,000 a year doctor or lawyer or Wall Street financier the same rate as the grocery store checkout clerk -- or Warren Buffett's secretary. In other words, abolish the "ceiling" on Social Security tax, and make everyone pay their fair share. This would go a long way toward solving any future financial shortfall in the Social Security system.

And perhaps with a few more modest changes around the edges, we can secure Social Security for ourselves and our children.

11 comments:

Excellent post with some great insights. I agree with you 100%, especially with regard to abolishing the wage ceiling. That's outrageous that a ceiling would even exist. And why is it none of the politicians mention the dramatic rise in payroll taxes to fund Baby Boomer retirements early in the Reagan years? What happened to that?

I think the whole thing about there not being enough money is a farce, created to make those right wingers who have a substantial income feel like their congress reps are actually doing something to help them save more money. It causes people to focus on seniors and the poor as areas to save money in and keeps people from looking closely at the real problems and where real money is being wasted such as on non-tax paying corporations, bail-outs, money given to corporations for nefarious reasons, low taxes on the wealthy, shall I go on. How about cutting subsidies to the agricultural industry? So much more money is spent on these things and many others that politicians don't what you to look at closely, and so they talk about social security and poor people on welfare. Give me a break!

Some of us weren't able, for one reason or another, to have savings and so depend on social security for survival. Personally, my check pays the rent, utilities, and food and then I still have no money for one week at the end of every month. NO money. There are many many people in the same situation who paid into SS all their working life but had low incomes.

Also, I've heard a lot of the more wealthy SS recipients say they don't need their checks and would not miss them. I'd say if you're making over $100,000 yearly, you don't need SS.

I think lifting the ceiling is a great way to solve the problem, "tax the rich" without making a distinction of who is rich. Everyone gets treated the same way--a flat tax as you say. Plus you are paying this increased tax while you are still earning an income and have the time to react in your own retirement planning (rather than having your benefits reduced when it's too late to do anything about it.) Plus you could probably even lower the rate from 6.2% to something lower and achieve more solvency simply by increasing the base.

I am not opposed to raising the retirement age a year or two, for people for whom retirement is a long way off--so they have time to plan. Working longer is not the only solution, putting more into savings, both retirement and non-retirement accounts is another way to bridge the gap until you can draw on social security (you can generally tap into retirement accounts at 59 1/2 and non-retirement accounts any time you need them.)

Re Problem 1: I would add that companies began laying off workers over 55 back in the nineties in huge numbers due to medical insurance costs and to cut down on pensions (which, of course, in the long run also contributed to the burden on Social Security). Today it is very difficult to get a real job at sixty.

And it isn't just the physical labor jobs that are problematic over sixty. AT 63, I can neither stand for very long at a time nor sit for more than thirty minutes at a time due to arthritis. I had to leave a private psychotherapy practice because I couldn't sit...a job I thought I'd be able to do into my eighties! A desk job is not the answer for people like me; I need to be able to change positions frequently and at will. So raising the age requirement to 70 will put a number of people in a financial black hole.

To your spine, sixty is not the new forty. Sixty is sixty to a hip joint or a facet joint or a lumbar disk.

Lifting the ceiling is excellent, necessary. And Dr. McCoy's question? I'd like an answer to that one, too.

Replacing the regressive tax with a flat tax that covers all (currently, income above $106,800 is not taxed) would cover 99 percent of the shortfall.

Adjusting the cost-of-living formula to the "chained" formula that President Obama once recommended, and now opposes, would cover the other one percent plus a bit more.

Eventually, when the Boomers pass from retirement to whatever awaits them at the end, the demographics will change back to a better worker-retiree ratio. So the problem is temporary in the very long run.

This would have been an easy fix in Obama's first year when Democrats controlled Congress. However, the administration chose to push health care reform instead. With the ideological struggle and attendant paralysis we now have in Congress, even an easy fix to a societal problem is unlikely.

The September/October issue of AARP The Magazine has a concise explanation of the problem and the effect of various reform measures.

Thoughtful post. I agree on the idea of a flat tax. I also think it's reasonable to have SSA benefits tied to income. If a person has a $100k income after retirement, does he need Social Security?

On the other hand, if that person has the good income because they saved and spent carefully through the years, is it fair to limit their SS while still paying out full amounts to folks who earned good money but spent it all on leisure stuff?

At the margin, there's controversy. But in general, the ideas you bring up are very sensible. Are we?

Great shot across the bow to all those in denial. The Ryan plan would not touch anyone now on SS or those nearing retirement. People under 50 would be affected. The idea is to increase the age to 70 to receive the full benefit and retain the age 62 for early retirement. Disabled would be able to go for DI.

Also cap should be raised as you suggest. Other ideas such as taxing "all income" are intersting and important.

When Bismark set up the German pension plan which has survived two world wars, he set the retirement age at 70.

Another thought: As this is an insurance plan, we could raise premiums when life expectancy increased.

Excellent piece and a good opening discussion. Now tackle the big problem.....Medicare. I dare you. Dianne

Thanks Tom, for venturing into these turbulent waters and giving your opinion.

WE all need to get brave (espec. Congress!!!) and get serious about problem solving. I share an exercise class with those over 65, and believe me, they understand fully how fortunate they were to be born at the right time to benefit fully from this system and Medicare.

Let's face it, most members of Congress are millionaires, so it isn't really their problem.The rest of us need to get smart and can any members of Congress who refuse to seriously work on fixing this system. Our futures depend on it!

Medicare? Oh no, that one's too hard for me -- although I do recall that when my son cracked his head on his desk in college and needed a couple of stitches, the dorm resident called an ambulance (school policy because of the lawyers), and then the ambulance charged $947.00 for a two mile ride to the hospital. So, fear of lawsuits, and then just the prices that medical providers charge -- that's where we could start.

Another thing on raising the SS age limit. As Nance pointed out, it may theoretically make sense to raise the age ... but in real life you cannot get a real job when you're 60. They say it's not age discrimination. But it is. So there'd have to be a BIG change in employer attitudes before the age of eligibility is raised.

"The system is paying out more than it's taking in." Some of us older people are also spending more than we are taking in; but, that does not signal a problem for us - if we have put away enough reserves to see us through the xx years in the future.

I am one who would gladly let someone else draw my SS check - someone who needed it much worse than I need it. I do not, however, have a problem with doing away with the cap on earnings on which SS is taxed. Cab Comp

About Me

I’m a Baby Boomer, part of the pig-in-a-python demographic group that has brought so many changes to America – and will continue to do so until we cash our last Social Security check. I had a typical baby boomer career. I attended college, went to business school, worked for several companies, then in my mid-50s was laid off. Meanwhile, I got divorced, and my two kids left for college. Now I live with my significant other, B, who has two children of her own. We live in the New York area, a convenient stopover for our four peripatetic 20-somethings. And I produce this blog Sightings Over Sixty which covers health, finance, retirement – concerns of people who realize that somehow they have grown up.